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Counterfeiting — What (and Who) Can You Trust?

Author(s):

Robin B. Gray Jr.

May/June 2009, eSide Supply Management Vol. 2, No. 3

The Real Impact of Fake Goods, and How to Avoid Sourcing Them

Counterfeiting is no longer just fake watches and DVDs; it involves pharmaceuticals, electronic components, medical devices, automotive and aircraft parts, navigation charts and much more. It has rapidly become the preferred business for organized crime, terrorist groups and state-supported industries.

A few shocking statistics:

The FBI estimates that counterfeiting and piracy of intellectual property (IP) amounts to as much as US$250 billion a year. And, according to the World Customs Organization, that figure could reach as high as US$600 billion in lost sales every year.
Counterfeiting and piracy have resulted in the loss of 750,000 jobs in the United States, according to the U.S. Customs and Border Protection Agency.
If counterfeiting of auto parts was eliminated, the U.S. Federal Trade Commission estimates the auto industry could hire 250,000 additional workers.
The U.S. Department of Commerce identified more than 9,000 incidents of counterfeit electronic parts in 2008.

Legislation Efforts on the Rise

Last year, growing concern over the impact and danger of counterfeit goods prompted the U.S. Congress to enact the PRO-IP Act, which toughens civil and criminal laws against counterfeiting and IP piracy and provides enhanced enforcement and prosecutorial resources. In late 2008, the General Services Administration (GSA) proposed a rule that would require contractors selling informational technology products to the U.S. Department of Defense, GSA and NASA to represent that such products are genuine. Currently, the GSA is considering a revised proposal which would extend the rule to other products purchased by the federal government.

According to the FBI, counterfeiting
and piracy of intellectual property
amounts to as much as US$250
billion a year.

In fact, the Department of Defense is so concerned about counterfeit electronic components in its supply chain that it sponsored a 2008 survey, conducted by the U.S. Office of Technology Evaluation (OTE), to determine the magnitude the problem. Among the most surprising findings was a preponderance of counterfeit electronic parts incidents in the $1.01 to $10 range, followed closely by parts in the $11 to $100 range. This indicated counterfeit electronic components were showing up in small-ticket items rather than expensive parts, such as microprocessors.

The OTE broadly defines a counterfeit product or part as:

An unauthorized copy
One which does not conform to the manufacturer's design, model and/or performance specifications
One which is not produced by the manufacturer, or is produced by unauthorized contractors
An off-specification, defective or used manufactured product sold as new or working
One which has incorrect or false markings and/or documentation
One which is sold as complying with applicable regulatory and/or industry standards

If your organization buys counterfeit products, the impact can be dramatic and severe. Its liability exposure can be enormous, particularly if the products it sells affect public health and safety.

Consider, for example, counterfeit parts that cause an airplane to crash or a brake system to fail on a school bus. Not only is that business at risk for lawsuits, but the damage to its brand and reputation is potentially huge. Tort lawyers can capitalize on cases like these, and government prosecutors can enact criminal and civil penalties.

Avoiding and Minimizing Risk

According to the OET, in 2008, 50 percent of counterfeit electronic components were bought from brokers (30 percent) and unauthorized distributors (20 percent). The remaining 50 percent came from more than 13 other sources, with no single source accounting for more than 7 percent.

Fortunately, finding an authorized source is as simple as checking a product manufacturer's Web site for a list of its authorized distributors and resellers. Also keep in mind that while you might be able to find genuine parts from unauthorized sources, many manufacturers are increasingly denying returns, warranty protection and support for products purchased outside the authorized channel.

Because good supply management practice dictates buying from authorized sources, the following recommendations apply.

Assess the seller's reputation. Does the seller stand behind the product? Many manufacturers will not honor warranties for product sold by an unauthorized seller. Also, will the seller provide technical and customer support?

Even if a seller seems reputable, do you know how reputable everyone else is in its supply chain? Products frequently change hands multiple times during production.

Determine the seller's financial stability. Does the seller have sufficient financial resources to honor refunds? Will it still be in business if that happens?

Practice quality control. Does the seller have quality control and authenticity procedures in place? Be wary of visual inspection procedures; many counterfeits cannot be spotted this way, particularly with regard to functionality, proper handling and storage, chemical composition and so on. Also be skeptical of random-sample testing because counterfeiters frequently “salt” genuine product with counterfeits.

Determine the product's traceability. Does the seller know where the product came from? Can it trace the product's route back to the original manufacturer?

Ask for documentation. Can the seller provide documentation regarding product compliance with all laws?

Assess legal liability. Will the seller assume product liability for penalties, damages and injuries resulting from product defect? Remember, buying from sources not authorized by the manufacturer might absolve that manufacturer from legal liability, even if the product is genuine. And, if the product is counterfeit, there is no manufacturer liability.

The Bottom Line for Supply Management Professionals

The best way to avoid or minimize your organization's counterfeiting risk is to buy exclusively from authorized sellers or resellers — either purchasing directly from the manufacturer or from a distributor or reseller contractually authorized by the product's manufacturer to resell the product. Doing so offers the best assurance that the product is genuine and provides the full benefits of warranty, liability protection and support.

Robin B. Gray Jr. is the executive vice president of the National Electronics Distributors Association in Alpharetta, Georgia. To contact the author, please send an e-mail to author@ism.ws.

For more articles and resources on counterfeiting, visit the ISM articles database.

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